Corporate Finance Update – Issue 9
ContentsFundraising Mergers and acquisitions Corporate Governance
Can a prospectus include forecast earnings ranges?
We have previously discussed the difficulties in compiling forecasts that comply with Regulatory Guide 170 Prospective financial information because of the uncertainties created by COVID-19. The most common approach by issuers has been to include shorter duration forecasts coupled with enhanced trading disclosures.
The use of forecasts with earnings ranges is not something we are likely to support, and it is not market practice for prospectuses. We believe issuers, who produce forecasts that are subject to review by an investigating accountant, should produce a single forecast. An earnings range may start to undermine the reasonable basis of a forecast. In a disclosure document, the accepted way to deal with material risk to a forecast is to disclose sensitivities.
Can a prospectus disclose ‘total contract value’?
Issuers that disclose ‘total contract value’ metrics in prospectuses should take care to ensure investors can understand the basis and assumptions underpinning the metric. For example, in a recent matter where the metric incorporated assumptions about future contract extensions, we required an explanation of the reasonable grounds which underpinned the issuer’s assessment of the likelihood of extension of those contracts.
We recently had concerns about the structure of scheme consideration offered to shareholders under a scheme of arrangement undertaken by an unlisted public company. The scheme consideration comprised an initial cash payment, dividends and earn-out consideration, and the total consideration to be paid under the scheme would not be known until 2026.
We were concerned shareholders were being asked to vote on the scheme where there was considerable uncertainty about the earn-out consideration they would receive. We also held serious concerns the earn-out consideration was contingent on disqualifying conditions which resembled restraints of trade that would ordinarily be negotiated between a company and its employees.
In this case, we decided not to pursue our concerns further because the scheme proponent’s share register mostly comprised current and former employees and company officers, and the independent expert had concluded the initial cash payment was fair, reasonable and in the best interests of shareholders. In his judgement, Justice Black accepted ASIC’s approach in Crestone Holdings Ltd, Re  NSWSC 433 (emphasis added):
ASIC … reserved its discretion to factor in concerns in relation to those matters in ASIC’s no objection statement and similar arrangements in future matters. It seems to me that the distinction which ASIC has drawn between the particular features of this scheme, where the scheme consideration would largely be received by current and former employees, directors and their associates, and schemes of arrangements involving widely held public companies and listed companies, is well founded.
We will continue to monitor the use of earn-out consideration in transactions and intervene where appropriate.
We carefully considered an independent expert’s obligations in a scheme of arrangement where the independent expert changed their opinion from ‘fair and reasonable’, to ‘not fair and not reasonable’ because of changes in a commodity price. This change occurred before the first court hearing and before shareholders were provided with a copy of the independent expert’s report.
This change in opinion prompted further commercial discussions between the target and the bidder because it was a condition precedent of the scheme implementation deed that the independent expert continue to conclude that the scheme was in the best interests of shareholders.
We considered whether the independence of the expert was compromised in circumstances where the target had provided the expert’s draft revised valuation range to the bidder and the bidder had subsequently increased the proposed scheme consideration to the bottom value of that range.
The expert confirmed they were aware of their ongoing obligations under Regulatory Guide 111 Content of expert reports (see RG 111.120) and had determined, of their own accord, there had been a change in material circumstances that required them to revise their report.
After ensuring shareholders were adequately informed of the circumstances surrounding the change in opinion and increase to the scheme consideration (in both the scheme booklet and the finalised independent expert’s report), we did not raise any issues about the content of the expert’s report or the independence of the expert.
We consider the independence of the expert is critical for the protection of security holders and remind experts to take care to avoid any actions that may undermine, or appear to undermine, their independence. We will continue to monitor independent expert reports prepared in connection with control transactions to ensure the independent expert providing the opinion is independent, including where an expert’s draft valuation range results in changes to the scheme consideration.
We recently considered an application for novel disaggregation and substantial holding relief from a special purpose vehicle. The application sought relief from the vehicle’s obligation to lodge substantial holding notices with respect to relevant interests arising from the vehicle’s 55% shareholding in a superannuation, pension, investment funds and platform business fund which invests in listed securities.
The applicant submitted that ASIC should provide the relief because:
- lodging notices aggregating the vehicle and fund’s relevant interests, and where the fund also lodges a separate notice, would result in market confusion
- the vehicle does not ‘control’ the fund for the purposes of sections 50AA and 608 of the Corporations Act 2001 (Corporations Act), and
- the requirement to lodge notices may prevent the vehicle from building a ‘pre-bid stake’ in a listed target.
We made an in-principle decision to refuse relief on the basis that a fulsome and properly drafted notice could dispel the alleged market confusion. The vehicle subsequently withdrew its relief application.
Market participants should be aware that ASIC will not readily provide wholesale relief to disaggregate relevant interests or exclude the substantial holding notice regime without exceptional circumstances.
We remind companies undertaking schemes of arrangement that the recent dispatch election provisions in sections 110C to 110K of the Corporations Act apply to the dispatch of documents for member meetings to vote on schemes of arrangement.
Members may make (and change) a standing election for documents to be sent to them in either physical or electronic form. Reasonable steps must be taken to send documents in a manner that matches with each member’s election. Companies should take care and confirm whether any members have made such elections before dispatch of their scheme documents.
Members can also make ‘ad hoc’ requests to receive a physical or electronic copy of a particular document within a reasonable time either before any dispatch deadline for the meeting materials, or after they have been sent (e.g. a recipient may request a hard copy of a meeting document shortly after receiving an electronic copy): see sections 110C–110J of the Corporations Act.
For more information on dispatch elections, please read our FAQs on virtual meetings for companies and registered schemes.
We recently provided relief to allow a compulsory acquirer to withdraw its compulsory acquisition notice and provide revised disclosure to shareholders. The application was made after the Takeovers Panel accepted an undertaking from the expert to prepare an amended expert report to address potential deficiencies, subject to receipt of relief from ASIC.
Under the general compulsory acquisition provisions of Part 6A.2 of the Corporations Act, a compulsory acquirer is required to provide shareholders with a notice containing certain specified information, including an independent expert’s report. The Corporations Act restricts the ability of a compulsory acquirer to withdraw a notice that has already been given to shareholders, even where that notice may contain disclosure deficiencies: see section 664C(6) of the Corporations Act.
We considered it appropriate to grant the relief because it would ensure shareholders received full and accurate information, allowing them to make an informed decision.
Our relief did not allow the compulsory acquirer to renege on its offer to acquire securities from shareholders or extend the deadline for the compulsory acquisition process. This is consistent with the principles in Part 6A.2 which are designed to:
- protect minority holders from ongoing uncertainty about the status of their holding
- ensure the compulsory acquisition process occurs in an efficient and informed market.
We continue to support companies’ efforts to promote member engagement with scheme of arrangement transactions. We also recognise some proponents may wish to undertake briefing presentations for their members and other stakeholders ahead of a scheme meeting.
We recently observed a demerger scheme of arrangement where the proponent sought and obtained orders at the first court hearing approving a briefing presentation to be given to its members and released by announcement on ASX. The court considered this approach consistent with the authorities that court approval be sought for any proposed presentation or supplementary disclosure to be made about a proposed scheme where the court is being called on to approve the explanatory material: Centro Retail Ltd and Centro MCS Manager Ltd in its Capacity as Responsible Entity of Centro Retail Trusts, Re  NSWSC 1321 at ; Investa Listed Funds Management Ltd, Re  NSWSC 344 at ; Walsh & Company Investments Ltd, Re  NSWSC 1746 at .
We remind proponents that if they seek to engage with members before a scheme meeting, they should take care and ensure that:
- they advise the court of any proposed briefing presentation and information sessions at the first court hearing
- they do not interfere with the court-approved ‘message’ before the meeting
- they keep records of any information presented by way of briefing presentation or other communications, and make those records available to ASIC before the second court hearing and to the court.
We will seek to review and provide comments on any briefing presentations that are to be put to the court. We may also wish to review other proposed communications to shareholders.
Prospectus relief for capital reduction by proprietary company and in-specie distribution of shares in a wholly-owned subsidiary
We recently granted prospectus relief for a proposed capital reduction and in-specie distribution of shares in a wholly-owned subsidiary because we were satisfied that:
- the proposed capital reduction did not result in a significant change to the shareholders’ overall investments
- shareholders were not making a new investment decision.
The transaction was part of a proposal to release shareholder value and restructure funding arrangements.
Regulatory Guide 188 Disclosure in reconstructions provides that we may give case-by-case relief from the prospectus requirements for a reconstruction or capital reduction in certain circumstances. This relief is usually from Parts 6D.2 and 6D.3 of the Corporations Act for offers contained in a notice of meeting, and sections 707(3) and 707(5) of the Corporations Act for the on-sale of securities issued as a result of that meeting.
In this instance, we extended our on-sale relief to the controlling shareholders of the demerged subsidiary by omitting section 707 of the Corporations Act. Relief was required:
- because the controlling shareholders may be required to on-sell a number of their shares under the terms of a shareholders’ agreement and call-option deed between all shareholders, and
- where any such on-sales may be caught by section 707(2) of the Corporations Act.
We were satisfied that the on-sale obligations in the shareholders’ agreement and call-option deed were not intended to circumvent the on-sale prohibitions that protect retail investors. We required copies of the agreements to be lodged with ASIC.
We expect organisations to have risk management frameworks that adequately address cybersecurity risk, and controls that protect key assets and enhance cyber resilience.
In an Australian first, an Australian financial services (AFS) licensee, RI Advice Group Pty Ltd, has been found to have breached its licence obligations after failing to adequately manage its cybersecurity risks and ensure the financial services covered by its licence were provided fairly and efficiently.
This decision involved the conduct of an AFS licensee and only considered those obligations. But it also serves as a timely reminder for companies and their directors about their cybersecurity risk oversight and disclosure obligations.
Measures taken should be proportionate to the nature, scale and complexity of your organisation — and the criticality and sensitivity of key assets held. This includes reassessment of cybersecurity risks on an ongoing basis, based on threat intelligence and vulnerability identification.
We also expect this to include oversight of cybersecurity risk throughout your organisation’s digital supply chain.
In addition to risk management, companies may be required to disclose cybersecurity risks and cyber incidents in a number of circumstances, including:
- disclosure to the relevant market operator
- risk disclosure in commentary to your annual report
- provisions in financial statements where the potential for a cyber incident may lead to material misstatement
- other mandatory reporting frameworks such as the Security of Critical Infrastructure Act 2018, Privacy Act 1988 or AFS licensee breach reporting.
All company directors are required by law to apply for a director identification number (director ID).
A director ID is a unique identifier which will help prevent the use of false or fraudulent director identities.
More than 600,000 directors have already obtained their director ID.
Australian Business Registry Services (ABRS) is responsible for delivering the director ID initiative. ASIC is responsible for enforcing director ID offences set out in the Corporations Act. It is a criminal offence if directors do not apply on time and penalties may apply.
ABRS has provided guidance to agents and intermediaries to help them support their director clients to apply for their director ID.
When people must apply for their director ID depends on when they first become a director:
- Directors appointed before 1 November 2021 have until 30 November 2022 to apply.
- New directors appointed for the first time between 1 November 2021 and 4 April 2022 had 28 days from their appointment to apply.
- From 5 April 2022, intending new directors must apply before being appointed.
Visit the ABRS website for more information and to apply.
ASIC Regulatory Portal lodgement issues: Outages, incorrect lodgements, timing and related party notices of meeting
Portal outages: Where planned outages occur, these will be communicated through the ASIC Regulatory Portal landing page. We encourage lodging parties to, where possible, submit lodgements before 9 pm (AEST) because planned outages are generally restricted to after this time.
Lodgements will otherwise need to wait until the portal can be accessed. This includes all applications which must be made through the portal and will not be accepted by other means.
Document lodgement errors: Where an incorrect or incomplete document has been lodged, the correct document will need to be provided through a new lodgement. This may require a replacement or supplementary disclosure document to be lodged. All new lodgements will incur additional fees.
Lodgement timeframes: If a lodgement through the portal is submitted at or just after midnight, even if the lodgement process was commenced before midnight, it will result in a date stamp of the following day and the lodgement will be taken as being received on the following day. We encourage lodgements through the portal to be made with sufficient time to ensure any applications or documents are dated the same day as lodgement.
Lodgement of related party notices of meeting: We remind companies that for related party notice of meeting lodgements, the proposed notice, explanatory statement, any expert reports and proxy form must be lodged in the final form (not draft) and signed in accordance with section 351 of the Corporations Act.
For further information please see the Regulatory Portal FAQs.